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What is the key difference between a realised and an unrealised gain on an investment?
AA realised gain arises on sale when cash is received, while an unrealised gain reflects a fair value change before any sale
BA realised gain is by definition always smaller than an unrealised gain on the same investment in any period
CAn unrealised gain is recorded only when the investment is sold and the cash proceeds have actually been received
DA realised gain is never reported in the financial statements, whereas an unrealised gain always reduces net income
Answer & Solution
Correct answer: A. A realised gain arises on sale when cash is received, while an unrealised gain reflects a fair value change before any sale
1. A realised gain occurs at the time of sale and is based on the cash received.
2. An unrealised gain arises when fair value changes but no sale has occurred, so no cash is received.
3. The two are unrelated in size, so B is wrong.
4. Unrealised gains do not depend on cash receipt (C is wrong), and realised gains are reported in profit or loss (D is wrong).
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.9.1 "Investments Overview", p.180_
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